Adventures in Needs Analysis: The Basis of Professional Judgment

1. Adventures in Needs Analysis:The Basis of Professional Judgment Jim Eddy, University of Michigan jimeddy@umich.edu http://ifap.ed.gov/efcformulaguide/attachments/111408EFCFormulaGuide0910.pdf

2. In this session we will: • Do needs analysis, then talk about it • Review or revisit the EFC formula in the process • Look at some recent regulatory EFC changes • Discuss IM practices and anything else we feel like talking about

3. Dependent Student Case Study: Dive in!

4. Arriving at Total Parent Income1. Parent’s 2008 AGI: 61341 2.a. Father’s work income^ 21117 2.b. Plus Mother’s work income^ 38192 Equals total Parent work inc.^ 59309 3. Parent’s taxable income 61341 4. Untaxed income: * Total 2400 = Total Untaxed 2400 5. Taxable and Untaxed 63741 6. Less offsets to income<3550> 7. Equals Total Parent Income 60191

5. Getting Parent Available Income (AI) 8. 2008 U.S. tax paid^ 5819 9. State/other tax (TableA1) 2408 10. Father’s FICA (Table A2)^ 1615 11. Mother’s FICA (Table A2)^ 2922 12. Income Protection Allow (T. A3)^ 26040 13. Employment Expense Allowance 3500 14. Total Allowances: 42304 Total Income (from line 7) 60191 Minus Total Allowances <42304> 15. Equals Available Income 17887

6. Parent Asset Contribution16. Cash & Savings^ 21672 17. Net Worth of Investments^ 14000 18. Net Worth Business/Inv. Farm^ 0 19. Adjust. Net. W. Business/Farm (A4) 0 20. Net Worth (sum 16, 17, 19) 35672 21. Edu. Savings/asset protect. (A5) 53700 22. Discretionary Net Worth (20-21) <18028> 23. Asset Conversion rate x .12 0 24. Contribution from assets 0

7. Finally…Parent ContributionParent’s Available Income (line 15) 17887 Plus Asset Contribution (line 24) 0 25. Equals Adjusted Available Income 17887 26. Total contrib. from AAI (Table A6) 4049 27. # in college, 09-10 (exclude parents)^ 2 28. Equals Parent Contribution 2025

8. Student Contribution: Total income29. Student AGI 3216 30. Student’s work income 3199 31. Taxable income 3216 32. Untaxed income: 0 Total untaxed income 0 33. Total, taxed/untaxed 3216 34. Less offsets to income 0 35. Equals Total Income 3216

9. Student Contribution: Allowances36. Student tax paid^ 36 37. State/other tax (Table A7) 96 38. Student FICA (Table A2) 245 39. Income Protection Allow. 3750 40. Allow. for Parent Neg. AAI 0 41. Total allowances 4127 Total Income (line 35) 3216 Less Total Allow. (line 41) 4127 42. Equals Available Inc. (AI) 0 43. Assessed at .50 0 44. Equals Student Cont. from AI 0

10. Student Contribution: Assets and Overall EFC45. Student cash, etc. 350 46. Student investments^ 0 47. Student bus./farm^ 0 48. New Worth (sum 45-47) 350 49. Assessed at .20^ 70 50. Contribution from assets: 70 Parent Contribution (line 28) 2025 Plus Student AI Contrib. (line 44) 0 Plus Student Cont. from assets 70 51. Equals Overall EFC 2095

11. Independent Student Without Dependents (other than a spouse) Case Study

12. Arriving at Total Student Income1. Student’s AGI: 49905 2.a. Student’s work income 6991 2.b. Plus Spouse’s work income 7374 Equals total work income 14365 3. Student/Spouse tax. income 49905 4. Untaxed income: 0 = Total Untaxed 0 5. Taxable and Untaxed 49905 6. Less offsets to income <0> 7. Equals Total Income 49905

13. Getting Student Available Income (AI) 8. 2008 U.S. tax paid^ 6706 9. State/other tax (Table B1) 2495 10. Student’s FICA (Table B2) 535 11. Spouse’s FICA (Table B2) 564 12. Income Protection Allow 7000 13. Employment Expense Allowance 2447 14. Total Allowances: 19747 Total Income (from line 7) 49905 Minus Total Allowances <19747> 15. Equals Available Income 30158

14. Student Asset Contribution:

15. Finally…Student ContributionStudent’s Available Income (line 15) 30158 Plus NO Asset Contrib. (Simple) 0 Equals Available Income 30158 Times 50% assessment rate equals 15079 Divided by number in college 2 Equals Total Contribution 7540

16. How many different EFC formulas/worksheets are there, anyway?

17. 1. Dependent Student, Regular2. Dependent Student, Simplified3. Independent, without Dependents other than a Spouse, Regular4. Independent, without Dependents other than a Spouse, Simplified5. Independent, with Dependents other than a Spouse, Regular6. Independent, with Dependents other than a Spouse, Simplified7. Auto Zero

18. What has changed (somewhat recently) in Federal Methodology Needs Analysis?

19. College Cost Reduction and Access Act of 2007:“CCRAA”

20. “HERA” Higher Education Reconciliation Act of 2005

21. • HERAincreased the income protection allowance for dependent students from $2,200 to $3,000 • CCRAAincreased this further: • AY2009-2010 - $3,750 • AY2010-2011 - $4,500 • AY2011-2012 - $5,250 • AY2012-2013 - $6,000

22. • HERAincreased the income protection allowance for single students or married students where both are enrolled from $5,000 to $6,050. • CCRAAincreased this further: • AY2009-2010 - $7,000 • AY2010-2011 - $7,780 • AY2011-2012 - $8,550 • AY2012-2013 - $9,330 • CCRAAalso added separated students to this category.

23. • HERAincreased the income protection allowance for married students where one is enrolled from $8,000 to $9,700. • CCRAAincreased this further: • AY2009-2010 - $11,220 • AY2010-2011 - $12,460 • AY2011-2012 - $13,710 • AY2012-2013 - $14,960 • CCRAAalso made similar increases for independent students with dependents other than a spouse.

24. “Total Income” Definition Effective July 1, 2009, CCRAAchanged the definition of “total income” by excluding: • Welfare benefits • Earned Income Credit • Special fuels credit • Excluded foreign income • Untaxed Social Security benefits • Additional Child Tax credit

25. “Independent Student” Definition Former language: • “an orphan or ward of the court or wasa ward of the court until the individual reachedthe age of 18” New language (effective July 1, 2009): • “is an orphan, in foster care, or a ward of thecourt, at any time when the individual is 13years of age or older”

26. “Independent Student” Definition CCRAAadded additional categories: • “is an emancipated minor or is in legalguardianship as determined by a court ofcompetent jurisdiction…” • “has been verified during the school year inwhich the application is submitted as either anunaccompanied youth who is a homelesschild…or as unaccompanied, at risk of homelessness, and self-supporting…

27. Excludable Income Definition • CCRAA added “special combat pay” to the definition of “excludable income.” • Special combat pay is defined as “pay received by a member of the Armed Forces because of exposure to a hazardous situation.” • Special combat pay cannot be treated as estimated financial assistance. • Effective July 1, 2009

28. Asset Definition • HERAadded “qualified education benefit” to the definition of asset. • CCRAAaddressed the ownership of these accounts: • Student asset if an independent student • If a dependent student, the asset is considered the parent’s whether the owner is the student or parent (Effective July 1, 2009)

29. Exclusion from Expected Assets: • CCRAAadded some additional exclusions to the definition of EFA. • Excluded are distributions not included in gross income from: • 529 plans • State pre-paid tuition plans • Coverdell education savings accounts. • Effective July 1, 2009

30. Simplified Needs Test • CCRAAmade two changes to the eligibility standards for the simplified needs test. • The first change added a new category of eligibility – dislocated workers. • This term was defined in the Workforce Investment Act of 1998.

31. Auto Zero EFC (Effective July 1, 2009) •CCRAA changed qualifying standard: • Income limit from $20,000 to $30,000 • Directs ED to adjust this limit annually based on increases in the CPI

32. Institutional Methodology: “IM”

33. Who uses it? • Many privates, some publics, often using the CSS Profile • Cost involved for filers, with some waiver exceptions • Non Custodial Parent (NCP) data can also be requested • Home equity considered; significant number of formulaic differences relative to FM

34. Why use it? • When “compelling budgetary concerns” make overall higher EFC’s desirable • When your institution believes all students are best served by a more realistic assessment of family financial strength • When another filter is helpful to sort out families who are likely not grant eligible • As an avenue to simply get Non Custodial Parent (NCP) data • Your answer here:

35. Other “IM” options include: • Institutional aid applications (sometimes for both needs analysis and scholarships) • Cherry picking some CSS Profile outputs • Running parallel processing, using CSS Profile calculation within PC spreadsheet or other software • Going after parent retirement assets • Other?

36. Q&A

37. GO FORTH AND PROSPER!

38. Dependent Student EFC, 2009-10: The Case (HANDOUT) Gerald is a prospective college freshman. His older sister Claire will be a junior at the University of Wisconsin, and little brother Dustin will be navigating the mysteries of junior high. Dad (Fred, age 49) and Mom (Jessica, age 47) spent some years self-actualizing before having children; both are currently employed. Everyone is a Michigan resident. Their 2008 Federal AGI was $61,341. Fred, a former auto worker, earned $21,117, and Jessica, a financial aid administrator, earned $38,192. Their federal tax paid was $5,819 (they need a better tax preparer, since they itemized but probably missed some significant deductions). They hold $21,672 in their combined savings and checking; they also have a small amount of 529 savings for the 3 kids, totaling $14,000. Their home is worth $243,000 in this market, but like so many of their neighbors they are leveraged to the hilt and owe $199,479 on the mortgage.

39. More details: They were able to claim a 2008 Hope educational credit on their taxes for Claire in the amount of $1650. Jessica contributed $2,400 (pre-tax) to her 401K plan in 2008. Fred also has another child from a previous relationship; this has contributed to the occasional spousal argument, but in fact Fred’s child support paid out in 2008 amounted to just $1,900. Jessica will be a half-time student herself in 2009-10 at their local area community college. Gerald filed a 2008 1040EZ, with an AGI of $3,216 and tax paid of $36. His income from his part time job was $3,199, and at the time of his FAFSA filing his savings stood at $350. Gerald hopes to teach some day, but he is very intelligent, so he will not be asking for a TEACH grant for 2009-10.

40. Independent Student EFC Calculation, 2009-10: The CaseCindy (age 23) and Doug (age 25) live a free flowing life. Each has been accepted into graduate school for 2009-010 (Cindy for Nursing, Doug for Ethnomusicology). Today, we are calculating Doug’s EFC. They were married in 2000, and have no children. They have lived and worked (O.K., they really haven’t worked all that much) in Oregon all of their lives.Doug inherited a large sum several years ago, and currently has $573,000 in various investments. He gets only a modest return, but he’s O.K. with that, it’s enough to get by; in 2008 he earned $27,300 in taxable dividends which is included in their AGI. Cindy is not quite as asset heavy; her inheritance was only $80,640, on which she realized $3,840 in 2008 interest, also included in their AGI.Cindy earned $7,374 via wage employment in 2008; Doug earned $6,991, and through some clumsy maneuvering by his former employer, he additionally collected $4,400 in 2007 unemployment insurance. Their 2008 AGI was $49,905, and their federal tax paid was $6,706. They filed a 1040, but were eligible to file a short form with the IRS. They live in a yurt on Cindy’s parent’s farm outside of Eugene.